Supply Chain Improvements Better for Trade than Eliminating Tariffs

By Al Bredenberg

February 5, 2013

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New research asserts that – contrary to long-held beliefs – reducing supply chain barriers and improving infrastructure could boost global GDP and world trade much more than cutting import tariffs and other customs restrictions.

Improvements in border administration, transportation, and telecommunications infrastructure and services could result in a 4.7 percent increase in global gross domestic product (GDP), yielding $2.6 trillion in added trade revenue worldwide through the elimination of these key supply chain barriers, according to new study from the World Economic Forum (WEF).

The report discusses problems and solutions around market access, border administration, transport, communications, and the quality of the business environment in countries around the world, concluding that a targeted approach to strengthening the global supply network would provide far greater benefits than the more commonly advocated strategy of reforming the tariff system.

The WEF is not arguing that reducing tariffs does no good. In fact, the study finds that eliminating all tariffs would increase global GDP by $0.4 trillion. However, the organization contends that the supply chain approach would improve production by a factor of six compared to lifting tariffs. The study finds that supply chain improvements would increase exports by $1.6 trillion, compared to a $1.1 trillion gain from eliminating tariffs.

Traditionally, most economists have argued that eliminating tariffs would be a good thing. In a paper published in the Economists’ Voice, Robert Whaples explains that “economists overwhelmingly favor free trade – apparently, the freer the better.” Out of 210 American economists surveyed, 87.5 percent believed that the U.S. should eliminate all tariffs and other trade barriers.

Given this widely held view of tariff reform, the WEF’s findings may seem to go against conventional wisdom. The WEF argues that lowering supply chain barriers is effective because it improves the efficiency of the movement of goods (in a way that is similar to boosting transportation productivity), thereby recovering resources that would otherwise be wasted. By contrast, tariff reductions primarily result in the reallocation of resources within an economy, while eliminating only the more modest inefficiency that derives from the tax.

Larger benefits accrue to society from supply chain improvements because costs become lower, making prices lower in turn. Consumers gain access to a wider variety of products, and higher GDP generates higher employment.

One of the biggest barriers the WEF points to is lack of consistency in regulations and agency actions between countries, or even within countries. Lack of regulatory standards, for example, “makes it significantly more costly for a company to operate in multiple foreign markets.”

Companies find that they have to invest heavily to cope with a variety of different regulations and are forced to complete far more paperwork than would be required under uniform standards. Sometimes they have to go so far as to change product specifications or dramatically reorganize supply chain practices just to meet the demands of individual countries or government agencies.

One chemical company cited in the report has to comply with regulations from five different agencies on average, resulting in shipping delays of its key acetyl products 30 percent of the time. Each late shipment costs the company $60,000 a day. In Brazil, customs paperwork for agricultural exports typically takes 12 times longer than similar processes in Europe.

One of the WEF's key policy recommendations is for governments to “remove the sets of barriers relevant to their industries.” This requires that each country analyze the current and likely future industries specific to the country to identify the most harmful trade barriers for those industries. Companies also need to expand their accounting practices for the global supply chain beyond tracking the most obvious costs, like labor expenses. Supply-chain-related factors like larger inventory and higher risk of theft can easily offset apparent gains.

Many countries would benefit significantly from improvements in their road, rail, sea, and air transportation networks to improve flow and decrease congestion and delays. In Brazil, one large agriculture and food product company has to rely on long-haul trucks for transport because the rail system is so poor. At the same time, highways are poorly maintained, which requires the company to reduce the speed and weight capacity of its trucks. In addition, failing port infrastructure causes choke-points when it's time to unload cargo.

Another important high-level recommendation involves implementing systems for collecting, managing, and analyzing supply chain data at both national and global levels. Governments and businesses must collaborate to create mechanisms that collect data on factors affecting supply chain operations and use it “to identify clusters of policies that jointly determine key supply chain barriers, identify priorities for action, and assess progress.”

Another essential element for a stronger global supply chain will be a global effort to convert documentation from manual and paper formats to electronic formats. Digitizing supply-chain processes consistently across borders and company boundaries will reduce costs and errors and speed up the movement of goods everywhere. The WEF's analysis finds, for example, that adopting electronic documentation in the air cargo industry could yield $12 billion in annual savings and prevent 70 to 80 percent of paperwork-related delays.